Business Capital

Why haven't I ever heard of Private Stock Offerings as a way to raise money?

Primarily because creating private stock offerings requires legal and technical expertise which is not generally available. If you were to find a securities attorney and ask them to create a Reg. D offering, they could do it for you, but most other business consultants have no knowledge of the process. To make private offerings accessible, we've not only packaged the necessary documents which have been created by securities and business attorneys, but, we've also created a database of nearly 10,000 active investors. Without this kind of resource, no matter who writes your offering, you will have a difficult time getting funding.

Can't I just form a corporation and sell stock?

Yes, however the potential legal problems are huge. All stock sales are governed by the rules of the Securities and Exchange Commission. If you sell stock without an offering document and without properly following all state and federal rules and regulations you could inadvertently wind up breaking the law or being sued by investors for fraud. A professionally created offering, proper filing of SEC documents and a complete review by your attorney are the only way to raise money and avoid problems.

What kinds of businesses can be funded with private offerings?

Practically all types of businesses that display long-range high-growth potential can be funded through private stock offerings. What is high-growth? Investors like to see the potential to have a business grow into the $5-10 million/year category within 3-5 years. Additionally, investors would like to see an exit strategy that makes sense (profit) to them. Good exit strategies might be going public within 3-5 years or a stock buy-back plan.

Are there any specific types of businesses that could not be funded by private offerings?

Certainly. Businesses with limited growth potential and a limited return potential for investors are not likely candidates for private stock sales. Similarly, things like MLM companies, one-man consulting or sales companies, etc. may have little appeal to investors. Private offerings may not be used to fund "extraction/exploration" types of businesses such as oil and natural gas drilling or mining operations.

It should be noted that "lifestyle" companies - companies created and operated by a single entrepreneur (even with several employees) are generally not attractive to investors. A management team is far more bankable than a "one-man-band". If you are a solo entrepreneur, we can often guide you through the process of building a management team that will be attractive to investors.

Are there really people who will invest in my company?

Absolutely yes! Remember that in the public stock markets there are people who invest in a wide range of companies. The same is true for private investments. If your product or service is attractive and your business plan shows profitable growth and a viable exit strategy for investors, you will likely attract people interested in participating in your venture.

Think about this: Suppose you had the opportunity to invest in a company's start-up or early developmental stage at $1 per share. Within 3 years that company went public at an offering price of $18 which was bid up to $32 in the first day of public trading. Would that be attractive to you as an investor? Now consider this: Ebay.com went public in late 1998 at an offering price of $18 and now is trading at over $220 with talk of a split(3 for 1). If you could have invested seed funds at $1 per share, would that have been a good investment?

We have a large database of accredited, active investors who are always interested in finding new companies with great potential.

Do I have to work with an attorney?

Technically no, but, we strongly recommend that you have your offering reviewed by an attorney. Because we've developed our formats and software with the help of securities and business attorneys, only a review and minor changes should be necessary. By using us or our software to create the offering and having an attorney review the finished product you will create a quality offering and save thousands of dollars. (We have had attorneys purchase our software to use as the basis for creating offerings for their clients!)

Do you recommend specific attorneys?

No. We are not associated with any attorneys and do not make recommendations. This eliminates any possiblity for conflicts of interest. You may get the names of attorneys specialized in securities work by contacting your State Bar Association or looking in the Yellow Pages.

I understand that each private offering will state a "minimum" - what happens if stock sales don't reach the minimum?

Each offering (private placement memorandum) will state what is to be done if the minimum is not reached. Usually, the minimum is set because it is the smallest amount of money required to realistically achieve the goals and business objectives stated in the offering. Obtaining the minimum amount will let you carry out your business plan (if even in a minimized format). When selling stock, all money collected is placed into an escrow account until the minimum amount has been raised - none of the money can be spent until the minimum has been reached. Normally if the minimum amount is not raised by the offering closing date, all moneys in the escrow account are returned to the investors.

How does the stock market effect private stock investments?

Often, the movements of the public markets (NYSE, NASDAQ, etc.) serve as indicators to private investors. If public markets are declining, investors are often reluctant to put money into private companies too. Conversely, when public markets are doing well, investors may feel confident to invest in private companies. Another influence that the public markets have on private stock investments is in indicating "hot" market areas. Currently, the NASDAQ index has skyrocketed largely due to Internet, Computer and other technology stocks. This activity may make investors interested in similar young companies that are doing a private offering.

Downturns in the public markets are not always bad for private offerings. Market downturns (like we experienced in Sept.-Oct. '98) are usually a good time to get a private offering completed so you are ready to move quickly when the markets move upward again and private investors start considering what private offerings look attractive.

What about "going public"?

Doing an Initial Public Offering (IPO) or "going public" is not a simple, easy or cheap process. An underwriting company must be found, considerable legal work must be done and a full filing and review by the SEC is necessary. Without an impressive track record, or a breakthrough product (not just a bright idea - something REALLY BIG), an IPO is out of the question for most young companies. Currently, most experts place the cost of an IPO at $400,000 plus commissions to the underwriting company. By starting with a private stock offering, many companies are able to get start-up and early stage funding in order to grow quickly to the point of doing an IPO within 3-5 years.

What about Venture Capital?

Venture Capital has been highly touted over the past couple of years. The number of VC firms is growing and the amount of available VC money is growing. Unfortunately for the small to medium-size business, that news is somewhat misleading. For most companies it is extremely difficult to get venture funding. VC companies see hundreds of business plans every week. Most VC firms actually do only 6-10 deals a year - usually in a certain preferred investment area. In the past year, the average size of a VC deal has gone up to $6.6 million and it's become common to involve several firms in a single deal to spread risk around. Outside of Silicon Valley, venture capital for "ideas" rather than working businesses is very rare. Still more rare is "seed funding" for unproven ideas and entrepreneurs.

An additional area to consider about VC deals is that most firms will want a significant portion of your business - often half or more. Depending on your management team, they may also want to appoint key personnel. They will always want at least one seat on your board of directors, and sometimes require a controlling interest. It is often normal to also have regular performance reviews and other oversight provisions so the VC firm can safegard its investment. Even for those lucky enough to get VC funding, this loss of control can often be a high price to pay.

Note in contrast, that private investment funding can be done for any amount from a couple hundred thousand dollars up to $5 or even $10 million. You retain complete control over the company and the board of directors.

I've heard I can get a grant - what about that?

For the most part, grants (free money) are a myth. The myth is mainly perpetuated by those who are selling books and reports that claim to give you sources of free money. If you want to pursue grants, don't buy any books or reports - contact your local SBA office first. If there are legitimate grants available in your area, they should be able to point you in the right direction.

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Venture Capital Glossary          Entrepreneur Funding Glossary          Business Capital Glossary

Business Funding Glossary          Limited Liability Partnerships Glossary          Regulation D Stock Offerings (Reg D) Glossary          IPO Stock Offering Glossary

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